John Maynard Keynes

GENERAL THEORY OF EMPLOYMENT, MONEY AND INTEREST

BOOK VI

Chapter 23

NOTES ON MERCANTILISM, THE USURY LAWS, STAMPED MONEY AND THEORIES OF
UNDER-CONSUMPTION

[...]

VI

It is convenient to mention at this point the strange, unduly neglected
prophet Silvio Gesell (1862-1930), whose work contains flashes of deep
insight and who only just failed to reach down to the essence of the matter.
In the post-war years his devotees bombarded me with copies of his works;
yet, owing to certain palpable defects in the argument, I entirely failed to
discover their merit. As is often the case with imperfectly analysed
intuitions, their significance only became apparent after I had reached my
own conclusions in my own way. Meanwhile, like other academic economists, I
treated his profoundly original strivings as being no better than those of a
crank. Since few of the readers of this book are likely to be well
acquainted with the significance of Gesell, I will give to him what would be
otherwise a disproportionate space. Gesell was a successful German [175]
merchant in Buenos Aires who was led to the study of monetary problems by
the crisis of the late 'eighties, which was especially violent in the
Argentine, his first work, Die Reformation im Münzwesen als Brücke zum
socialen Staat, being published in Buenos Aires in 1891. His fundamental
ideas on money were published in Buenos Aires in the same year under the
title Nervus rerum, and many books and pamphlets followed until he retired
to Switzerland in 1906 as a man of some means, able to devote the last
decades of his life to the two most delightful occupations open to those who
do not have to earn their living, authorship and experimental farming.

The first section of his standard work was published in 1906 at Les Hauts
Geneveys, Switzerland, under the title 'Die Verwirklichung des Rechtes auf
den vollen Arbeitsertrag', and the second section in 1911 at Berlin under
the title 'Die neue Lehre vom Zins'. The two together were published in
Berlin and in Switzerland during the war (1916) and reached a sixth edition
during his lifetime under the title 'Die natürliche Wirtschaftsordnung durch
Freiland und Freigeld', the English version (translated by Mr Philip Pye)
being called "The Natural Economic Order". In April 1919 Gesell
joined the short-lived Soviet cabinet of Bavaria as their Minister of
Finance, being subsequently tried by court-martial. The last decade of his
life was spent in Berlin and Switzerland and devoted to propaganda. Gesell,
drawing to himself the semi-religious fervour which had formerly centred
round Henry George, became the revered prophet of a cult with many thousand
disciples throughout the world. The first international convention of the
Swiss and German Freiland-Freigeld Bund and similar organisations from many
countries was held in Basle in 1923. Since his death in 1930 much of the
peculiar type of fervour which doctrines such as his are capable of exciting
has been diverted to other (in my opinion less eminent) prophets. Dr Buchi
is the leader of the movement in England, but its literature seems to be
distributed from San Antonio, Texas, its main strength lying to-day in the
United States, where Professor Irving Fisher, alone amongst academic
economists, has recognised its significance. In spite of the prophetic
trappings with which his devotees have decorated him, Gesell's main book is
written in cool, scientific language; though it is suffused throughout by a
more passionate, a more emotional devotion to social justice than some think
decent in a scientist. The part which derives from Henry George [176],
though doubtless an important source of the movement's strength, is of
altogether secondary interest. The purpose of the book as a whole may be
described as the establishment of an anti-Marxian socialism, a reaction
against laissez-faire built on theoretical foundations totally unlike those
of Marx in being based on a repudiation instead of on an acceptance of the
classical hypotheses, and on an unfettering of competition instead of its
abolition. I believe that the future will learn more from the spirit of
Gesell than from that of Marx. The preface to "The Natural Economic
Order" will indicate to the reader, if he will refer to it, the moral
quality of Gesell. The answer to Marxism is, I think, to be found along the
lines of this preface.

Gesell's specific contribution to the theory of money and interest is as
follows. In the first place, he distinguishes clearly between the rate of
interest and the marginal efficiency of capital, and he argues that it is
the rate of interest which sets a limit to the rate of growth of real
capital. Next, he points out that the rate of interest is a purely monetary
phenomenon and that the peculiarity of money, from which flows the
significance of the money rate of interest, lies in the fact that its
ownership as a means of storing wealth involves the holder in negligible
carrying charges, and that forms of wealth, such as stocks of commodities
which do involve carrying charges, in fact yield a return because of the
standard set by money. He cites the comparative stability of the rate of
interest throughout the ages as evidence that it cannot depend on purely
physical characters, inasmuch as the variation of the latter from one epoch
to another must have been incalculably greater than the observed changes in
the rate of interest; i.e. (in my terminology) the rate of interest, which
depends on constant psychological characters, has remained stable, whilst
the widely fluctuating characters, which primarily determine the schedule of
the marginal efficiency of capital, have determined not the rate of interest
but the rate at which the (more or less) given rate of interest allows the
stock of real capital to grow. But there is a great defect in Gesell's
theory. He shows how it is only the existence of a rate of money interest
which allows a yield to be obtained from lending out stocks of commodities.
His dialogue between Robinson Crusoe and a stranger [177] is a most
excellent economic parable - as good as anything of the kind that has been
written - to demonstrate this point. But, having given the reason why the
money-rate of interest unlike most commodity rates of interest cannot be
negative, he altogether overlooks the need of an explanation why the
money-rate of interest is positive, and he fails to explain why the
money-rate of interest is not governed (as the classical school maintains)
by the standard set by the yield on productive capital. This is because the
notion of liquidity-preference had escaped him. He has constructed only half
a theory of the rate of interest.

The incompleteness of his theory is doubtless the explanation of his work
having suffered neglect at the hands of the academic world. Nevertheless he
had carried his theory far enough to lead him to a practical recommendation,
which may carry with it the essence of what is needed, though it is not
feasible in the form in which he proposed it. He argues that the growth of
real capital is held back by the money-rate of interest, and that if this
brake were removed the growth of real capital would be, in the modern world,
so rapid that a zero money-rate of interest would probably be justified, not
indeed forthwith, but within a comparatively short period of time. Thus the
prime necessity is to reduce the money-rate of interest, and this, he
pointed out, can be effected by causing money to incur carrying-costs just
like other stocks of barren goods. This led him to the famous prescription
of 'stamped' money, with which his name is chiefly associated and which has
received the blessing of Professor Irving Fisher.

According to this proposal currency notes (though it would clearly need
to apply as well to some forms at least of bank-money) would only retain
their value by being stamped each month, like an insurance card, with stamps
purchased at a post office. The cost of the stamps could, of course, be
fixed at any appropriate figure. According to my theory it should be roughly
equal to the excess of the money-rate of interest (apart from the stamps)
over the marginal efficiency of capital corresponding to a rate of new
investment compatible with full employment. The actual charge suggested by
Gesell was 1 per mil. per week, equivalent to 5.2 per cent per annum. This
would be too high in existing conditions, but the correct figure, which
would have to be changed from time to time, could only be reached by trial
and error.

The idea behind stamped money is sound. It is, indeed, possible that
means might be found to apply it in practice on a modest scale. But there
are many difficulties which Gesell did not face. In particular, he was
unaware that money was not unique in having a liquidity-premium attached to
it, but differed only in degree from many other articles, deriving its
importance from having a greater liquidity-premium than any other article.
Thus if currency notes were to be deprived of their liquidity-premium by the
stamping system, a long series of substitutes would step into their shoes -
bank-money, debts at call, foreign money, jewellery and the precious metals
generally, and so forth. As I have mentioned above, there have been times
when it was probably the craving for the ownership of land, independently of
its yield, which served to keep up the rate of interest; - though under
Gesell's system this possibility would have been eliminated by land
nationalisation.